matechexh10_7.htm


    
      
        

      
Exhibit 10.7

    


    SECURITY
AGREEMENT

    


    SECURITY
AGREEMENT dated as of July 31, 2008, by and between Material Technologies, Inc.,
a Delaware corporation (the “Borrower”, sometimes
referred to herein as the “Grantor”), and
KREUZFELD LTD. (“Lender”), in connection with that certain Secured Convertible
Debenture, dated as of the date hereof (the “Debenture” or the “Loans”).
Capitalized terms not otherwise defined herein shall have the meaning set forth
in that certain Secured Convertible Debenture dated as of the same date
hereof.

    


    The
parties acknowledge the following facts and circumstances:

    


    The
Lender has agreed to extend the Loans to the Borrower pursuant to, and subject
to the terms and conditions of, certain agreements, including this Security
Agreement, the Debenture, and such other agreements and documents as may relate
to any present or future loans, as all such agreements may be amended, modified
or supplemented from time to time, and any consulting agreement or other
agreement between the parties (the “Loan Documents”).  The obligation
of the Lender to extend such Loans is and was conditioned on the execution and
delivery by the Grantor of a security agreement in a form consistent herewith to
secure the Obligations.

    


    Accordingly,
the Grantor and the Lender hereby agree as follows:

    


    1)            
Definitions of Terms
Used Herein. As used herein, the following terms shall have the following
meanings:

    
 

    a)           
“Accounts
Receivable” means (i) all of the Grantor’s present and future accounts,
general intangibles, chattel paper and instruments, as such terms are defined in
the Uniform Commercial Code, (ii) all moneys, securities and other property and
the proceeds thereof, now or hereafter held or received by, or in transit to,
the Lender from or for the Grantor, whether for safekeeping, pledge, custody,
transmission, collection or otherwise, and all of the deposits (general or
special) of the Grantor, balances, sums and credits with, and all of the
Grantor’s claims against the Lender at any time existing, (iii) all of the
Grantor’s right, title and interest, and all of the Grantor’s rights, remedies,
security and Liens, in, to and in respect of any accounts receivable, including,
without limitation, rights of stoppage in transit, replevin, repossession and
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party, guaranties or other contracts of suretyship with respect to accounts
receivable, deposits or other security for the obligation of any account debtor,
and credit and other insurance, (iv) all of the Grantor’s right, title and
interest in, to and in respect of all goods relating to, or which by sale have
resulted in, accounts receivable, including, without limitation, all goods
described in invoices or other documents or instruments with respect to, or
otherwise representing or evidencing, any account receivable, and all returned,
reclaimed or repossessed goods, (v) any other right to payment for goods sold,
leased or licensed or for services rendered, whether or not it has been earned
by performance, whether billed or unbilled,


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    and
whether or not it is evidenced by any Contract, (vi) any note receivable,
and (vii) any other receivable or right to payment of any
nature.

    


    b)          
 “Borrower
Companies” means the Borrower, and all subsidiaries of the Borrower or
any of its subsidiaries.

    


    c)          
 “Cash”
means any cash on hand, cash in bank or other accounts, readily marketable
securities, and other cash-equivalent liquid assets of any nature.

    


    d)         
  “Collateral” means all
(i) Cash, (ii) Accounts Receivable, (iii) Documents, (iv) Equipment, (v) General
Intangibles, (vi) Inventory, (vii) all right, title and interest in any and all
assets, (viii) all Intellectual Property Rights, (viii) all capital stock of any
of the Borrower Companies beneficially owned by such Borrower Company, and (ix)
Proceeds. (See also Exhibit A)

    


    e)           
“Contract”
means any written or oral contract, agreement, instrument, order, arrangement,
commitment or understanding of any nature, including sales orders, purchase
orders, leases, subleases, data processing agreements, maintenance agreements,
license agreements, sublicense agreements, loan agreements, promissory notes,
security agreements, pledge agreements, deeds, mortgages, guaranties,
indemnities, warranties, employment agreements, consulting agreements, sales
representative agreements, joint venture agreements, buy-sell agreements,
options or warrants.

    


    f)          
  “Documents” means all
instruments, files, records, ledger sheets and documents covering or relating to
any of the Collateral.

    


    g)            “Equipment” means all
of the Grantor’s machinery, equipment, vehicles, furniture and fixtures and all
attachments, accessories and equipment now or hereafter owned or acquired in the
Grantor’s business or used in connection therewith, and all substitutions and
replacements thereof, wherever located, whether now owned or hereafter acquired
by the Grantor.

    


    h)      
     “Financial
Obligations” means any debt, liability or obligation of any nature,
whether secured, unsecured, recourse, no recourse, liquidated, unliquidated,
accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown
or otherwise.

    


    i)           
 “General
Intangibles” means all of the Grantor’s present and future general
intangibles of every kind and description, including (without limitation)
Intellectual Property Rights, patents, patent applications, trade names and
trademarks and the goodwill of the business symbolized thereby, Federal, State
and local tax refund claims of all kinds; and all contract
rights of the Grantor, including, without limitation, the
Contracts.

    


    j)        
   “Intellectual Property
Rights” shall mean all rights and interests (throughout the universe, in
all media, now existing or created in the future, and for the entire duration of
such rights) arising under statutory or common law, contract, license or
otherwise, and whether or not perfected, including, without limitation all: (i)
copyrights, and all registrations, applications for registration
and


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    licenses
therefore, together with ancillary rights thereto; (ii) trademarks, trade names,
service marks, service names, domain names, published telephone numbers, logos,
slogans and any abbreviations or variations thereto, and all registrations,
applications for registration and licenses therefore, and any attendant goodwill
together with all ancillary rights thereto; (iii) issued or pending patents and
all registrations, applications for registration, reissues, divisions,
continuations, continuations-in-part, renewals and extensions thereof and
licenses therefore, together with all ancillary rights thereto; (iv) trade
secrets and know-how, designs, improvements, formulae, discoveries, inventions,
concepts, ideas, scientific or other technical information and procedures,
legal, financial or business affairs, markets, products, key personnel,
suppliers, customers, prospective customers, policies or operational methods,
plans for future development, other information possessed which is not readily
available to the public, and all copies of the foregoing, regardless of form;
(v) the Software; and (vi) all contracts with government or commercial agencies
and all licenses, permits, filings, authorizations, approvals, or indicia of
authority issued by any government branch, department, commission, board,
bureau, agency or other instrumentality of the United States, any foreign
government or any state of political subdivision thereof.

    


    k)           “Inventory” means all
of the Grantor’s raw materials, work in process, finished goods and all other
inventory (as such term is defined in the Uniform Commercial Code), whether now
owned or hereafter acquired, and all wrapping, packaging, advertising and
shipping materials, and any documents relating thereto.

     

    l)            
“Obligations”
mean all obligations of Borrower to Lender or any other party under the Loan
Documents, including, without limitation, (a) the due and punctual payment of
the principal of and interest on the Loans, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise and (b) the due and punctual performance of all obligations of the
Grantor at any time and from time to time under any of the Loan
Documents.

    


    m)           “Proceeds” means any
consideration received from the sale, exchange, lease or other disposition of
any asset or property which constitutes Collateral, any other value received as
a consequence of the possession of any Collateral and any payment received from
any insurer or other person or entity as a result of the destruction, loss,
theft or other involuntary conversion of whatever nature of any asset or
property that constitutes Collateral, and shall include, without limitation, all
cash and negotiable instruments received or held by the Lender pursuant to any
lockbox or similar arrangement relating to the payment of Accounts
Receivable.

    


    n)           “Software” means any
computer program, operating system, applications system, firmware or software of
any nature, whether operational, under development or inactive, including all
HTML code, CGI scripts, Java applets, digital content, programming,
documentation, network configurations, a reasonably detailed description of the
process required to build such computer software, any proprietary tools or files
owned that are required to build such computer software, as well as a
description of all tools and files not owned that are required to build such
computer software and any modifications, enhancements, improvements, updates,
upgrades, new releases, revisions, refinements or revisions thereto, whether in
analog, digital, source code, object code, or other form, in each case to the
extent required for or used in the performance of the business
as


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    conducted
in the past or as currently conducted, object code, source code, databases,
technical manuals, user manuals and other documentation therefore, whether in
machine-readable form, programming language or any other language or symbols,
and whether stored, encoded, recorded or written on disk, tape, film, memory
device, paper or other media of any nature, including, without limitation, all
software used in or with respect to Borrower’s electronic voting
system.

    


    2)            
Security
Interests.  As security for the payment or performance, as the
case may be, of the Obligations, the Grantor hereby creates and grants to the
Lender, its successors and its assigns, a security interest in the Collateral
(the “Security
Interest”).  Without limiting the foregoing, the Lender is
hereby authorized to file one or more financing statements, continuation
statements or other documents for the purpose of perfecting, confirming,
continuing, enforcing or protecting its Security Interest in the Collateral,
naming the Grantor as debtor and the Lender as secured party.  The
Grantor agrees at all times to keep in all material respects accurate and
complete accounting records with respect to the Collateral, including, but not
limited to, a record of all payments and Proceeds received.  Borrower
shall deliver to Lender, for the purpose of perfecting the Security Interest
granted hereby, all capital stock and other securities currently owned by any of
the Borrower Companies, and shall deliver to Lender such documents, and take
such action, as is or may in the future be required to continuously maintain and
perfect the Security Interest granted in this Security Agreement.

    


    3)        
    Except as disclosed in its filings with the Securities
and Exchange Commission, Borrower represents and warrants to Lender as of the
date of this Agreement, and covenants with Lender, as set forth below in each
provision of this Section 3.  Any breach or failure of any of the
representations, warranties and covenants contained in this Agreement, as
supplemented by the Borrower’s filings with the Securities and Exchange
Commission prior to the date hereof, shall be a breach of this Security
Agreement and the Loan Documents.

    


     3.1           Organization.  Each
of the Borrower Companies is a corporation duly organized, validly existing and
in good standing under the Laws of the jurisdiction of its
organization.  Each of the Borrower Companies possesses the full power
and authority to enter into and perform this Agreement.  Each of the
Borrower Companies possesses the full corporate power and authority to own its
Assets and to conduct its business as and where presently conducted. Each of the
Borrower Companies is duly qualified or registered to do business in each
jurisdiction where such qualification or registration is required by applicable
Law.

    


     3.2           Due
Authorization.  The transactions contemplated hereby, as well
as the transactions contemplated in the Security Agreement and the Loan
Documents (the “Transactions”) have been duly authorized by all necessary
corporate actions including actions by the Borrower’s board of directors and
does not constitute a violation of or default under its articles of
incorporation, or bylaws (or similar organizational documents).  The
Borrower’s execution, delivery and performance of this Agreement, and its
consummation of the Transactions, (a) do not constitute a default or breach
(immediately or after the giving of notice, passage of time or both) under any
Contract to which any of the Borrower Companies is a party or by which any of
the Borrower Companies is bound, (b) do not constitute a violation of any
Law or Judgment that is applicable to any of the


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    Borrower
Companies, or to the business or Assets of any of the Borrower Companies, or to
the Transactions, (c) do not accelerate or otherwise modify any Financial
Obligation of any of the Borrower Companies, (d) do not result in the
creation of any Encumbrance upon, or give to any third party any interest in,
any of the business or Assets, or any of the capital stock of or interests in,
any of the Borrower Companies, and (e) do not require the Consent of any
Person.  This Agreement constitutes the valid and legally binding
agreement of the Borrower enforceable against it in accordance with its terms,
except to the extent that its enforceability may be subject to applicable
bankruptcy, insolvency, reorganization and similar laws affecting the
enforcement of creditors’ rights generally and to general equitable
principles.

    


     3.3           Capital Stock and
Ownership.  All of the issued and outstanding shares of capital
stock of each of the Borrower Companies have been duly authorized and validly
issued, and are fully paid and non-assessable, with no liability or preemptive
rights attaching to the ownership thereof.  All issuances and grants
of all outstanding options, warrants and all offerings, sales and issuances by
each of the Borrower Companies of any shares or other equity interests were
conducted in compliance with all applicable federal and state securities Laws
and all applicable state corporation Laws.  .

    


     3.4           Financial and Corporate
Records.  The books and records of each of the Borrower
Companies are and have been properly prepared and maintained in form and
substance adequate for preparing audited financial statements in accordance with
GAAP, and such books and records fairly and accurately reflect in all material
respects the financial condition and all of the Assets and Financial Obligations
of each of the Borrower Companies and all Contracts and other transactions to
which each of the Borrower Companies is or was a party or by which each of the
Borrower Companies or the business or Assets of each of the Borrower Companies
is or was affected.  All of the Company’s filings with the Securities
and Exchange Commission are true, complete and correct, were prepared in
accordance with GAAP, are in full compliance with all applicable laws, and do
not contain any untrue statement of material fact, or omit to state any material
fact that is necessary to make the statements made, in light of the
circumstances under which they are made, not false or misleading in any
respect.

    


     3.5           Compliance with
Law.  The operations of each of the Borrower Companies, the
conduct of the business of each of the Borrower Companies, as and where such
business has been or presently is conducted, and the ownership, possession and
use of the Assets of each of the Borrower Companies have complied and currently
do comply in all material respects with all applicable Laws.

    


     3.6           Assets.  Each of
the Borrower Companies has good and valid title to all of its respective Assets
which are owned by it and has the right to transfer all rights, title and
interest in such Assets, free and clear of any Encumbrance.

    


     3.7           Software and Other
Intangibles.  Except for shrinkwrap and other commercially
available Software, each of the Borrower Companies has good and valid title to,
and has the full right to use, all of the Software and General Intangibles, free
and clear of any Encumbrance (except for use restrictions contained in licensed
commercially available Software).  All shrinkwrap and other
commercially available Software has been properly licensed and all related fees
paid.  With respect to the Software, (a) the Borrower Companies
maintain machine-readable master-reproducible copies, source code
listings,


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    technical
documentation and user manuals for the most current releases or versions thereof
and for all earlier releases or versions thereof currently being supported by
them; (b) in each case, the machine-readable copy substantially conforms to
the corresponding source code listing; (c) it is written for use on
standard operating systems; (d) it can be maintained and modified by
reasonably competent programmers familiar with such language, hardware and
operating systems or other Persons with whom the Borrower presently has service
and maintenance agreements; and (e) in each case, it operates in accordance
with the user manual therefore without material operating
defects.  None of the Software or General Intangibles, or their
respective past or current uses, including the preparation, distribution,
marketing or licensing, has violated or infringed upon, or is violating or
infringing upon, any Software, technology, patent, copyright, trade secret or
other Intangible of any Person.  To the knowledge of the Borrower, no
Person is violating or infringing upon, or has violated or infringed upon at any
time, any of the Software or General Intangibles.  None of the
Software or General Intangibles is owned by or registered in the name of any
current or former owner, shareholder, partner, director, executive, officer,
employee, salesman, agent, customer, representative or contractor of any of the
Borrower Companies nor does any such Person have any interest therein or right
thereto, including the right to royalty payments.  Notwithstanding the
foregoing, the Company is obligated to pay royalty payments equal to not more
than 12% of sales on the Company’s “Fatigue Fuse” product, and a royalty of
approximately 10% of sales of the Company’s Fatigue Sensor product.

    


     3.8           Related Party
Transactions.  Except as fully disclosed in the Company’s
filings with the Securities and Exchange Commission, there are no current real
estate leases, personal property leases, loans, Contracts, transactions,
understandings or other arrangements of any nature between or among any of the
Borrower Companies and any current or former partner, owner, ten percent
shareholder, director, officer or controlling Person of any of the Borrower
Companies (or any of their respective predecessors).

    


     3.9           Full
Disclosure.  No representation or warranty made by the Borrower
in this Agreement or pursuant hereto (a) contains any untrue statement of
material fact; or (b) omits to state any material fact that is necessary to
make the statements made, in light of the circumstances under which they are
made, not false or misleading in any respect.  There is no fact known
to the Borrower or any of its subsidiaries, that has not been disclosed to
Lender in writing, that was or is or, so far as either the Borrower or any of
its subsidiaries can reasonably foresee, will have a material adverse effect on
any of the Borrower Companies, the business, the Assets or financial condition
of any of the Borrower Companies or the ability of the Borrower to perform its
obligations under this Agreement.

    


     3.10           Compliance.  The
Borrower shall comply with all federal and state securities laws, and file all
reports and disclosures required thereby in timely manner.

    


    4)           
 Further
Assurances.  The Grantor agrees, at its expense, to execute,
acknowledge, deliver and cause to be duly filed all such further instruments and
documents and take all such actions as the Lender may from time to time
reasonably request for the assuring and preserving of the Security Interest and
the rights and remedies created hereby, including, without limitation, the
payment of any fees and taxes required in connection with the execution and
delivery of this Agreement, the granting of the Security Interest and the filing
of any financing statements or other documents in connection


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    herewith.  If
any amount payable under or in connection with any of the Collateral shall be or
become evidenced by any promissory note or other instrument, such note or
instrument shall be promptly pledged and delivered to the Lender, duly endorsed
in a manner satisfactory to the Lender.  The Grantor agrees to notify
promptly the Lender of any change in its corporate name or in the location of
its chief executive office, its chief place of business or the office where it
keeps its records relating to the Accounts Receivable owned by it and the
location of any Equipment.  The Grantor agrees promptly to notify the
Lender if any material portion of the Collateral is damaged or
destroyed.

    


    5)          
  Inspection
and Verification.  The Lender and such persons as the Lender
may designate shall have the right, at any reasonable time or times during the
Grantor’s usual business hours, and upon reasonable notice (which may be
telephonic), to inspect the Collateral owned by the Grantor, all records related
thereto (and to make extracts and copies from such records), and the premises
upon which any such Collateral is located, to discuss the Grantor’s affairs with
the officers of the Grantor and its independent accountants and to verify under
reasonable procedures the validity, amount, quality, quantity, value, and
condition of or any other matter relating to, such Collateral, including, in the
case of Accounts Receivable or Collateral in the possession of a third person,
contacting account debtors and upon the occurrence of an Event of Default or a
third person possessing such Collateral for the purpose of making such a
verification.

    


    6)          
  Taxes;
Encumbrances.  At its option, the Lender may discharge past due
taxes, liens, security interests or other encumbrances at any time levied or
placed on the Collateral and not permitted under the Loan Documents, and may pay
for the maintenance and preservation of the Collateral to the extent a Grantor
fails to do so as required by the Loan Documents, and the Grantor agrees to
reimburse the Lender on demand for any payment made or any expense incurred by
it pursuant to the foregoing authorization; provided, however, that nothing
in this Section 6 shall be interpreted as excusing the Grantor from the
performance of any covenants or other promises with respect to taxes, liens,
Security Interests or other encumbrances and maintenance as set forth herein or
in the Loan Documents.

    


    7)        
    Representations and
Warranties.  The Grantor represents and warrants to the Lender
that:

    


    a)           
 Title and
Authority.  It has (i) rights, interest in and to the
Collateral in which it is granting a security interest hereunder and (ii) the
requisite power and authority to grant to the Lender the Security Interest in
such Collateral pursuant hereto and to execute, deliver and perform its
obligations in accordance with the terms of this Agreement, without the consent
or approval of any other person other than any consent or approval which has
been obtained.

    


    b)       
     Filing.  Fully
executed Uniform Commercial Code financing statements and other such documents
as may be necessary containing a description of the Collateral shall have been,
or shall be delivered to the Lender in a form such that they can be, filed of
record in every governmental, municipal or other office in every jurisdiction in
which any portion of the Collateral is located necessary to publish notice of
and protect the validity of and to establish a valid, legal and perfected
security interest in favor of the Lender in respect of the Collateral in which a
security


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    interest
may be perfected by filing in the United States and its territories and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of Uniform Commercial Code continuation statements.

    


    c)            
Validity of Security
Interest.  The Security Interest constitutes a valid, legal and
perfected security interest in all of the Collateral for payment and performance
of the Obligations.

    


    d)            
Information Regarding
Names.  It has disclosed in writing to the Lender any trade
names used to identify it in its business or in the ownership of its
properties.

    


    e)          
  Survival
of Representations and Warranties.  All representations and
warranties of the Grantor contained in this Agreement shall survive the
execution, delivery and performance of this Agreement until the termination of
this Agreement.

    


    8)            
Records of Accounts
Receivable.  The Grantor shall keep or cause to be kept records
of its Accounts Receivable which are accurate in all material
respects.  In addition, the Grantor will provide the Lender with such
further schedules and/or information respecting each Account Receivable as the
Lender may reasonably require.

    


    9)            
Protection of
Security.  The Grantor shall, at its own cost and expense, take
any and all actions reasonably necessary to defend title to the Collateral owned
by it against all persons and to defend the Security Interest of the Lender in
such Collateral, and the priority thereof, against any adverse mortgage, pledge,
security interest, Lien, charge or other encumbrance of any nature
whatsoever.  The Grantee understands that the security interest
granted herein, and the line created hereby, is junior in priority to an
existing security interest.

    


    10)           Continuing Obligations of
the Grantor.  The Grantor shall remain liable to observe and
perform all the conditions and obligations to be observed and performed by it
under each contract, agreement, interest or obligation relating to the
Collateral, all in accordance with the terms and conditions thereof, and shall
indemnify and hold harmless the Lender from any and all such
liabilities.

    


    11)           Use and Disposition of
Collateral.  Without the prior written consent of Lender, the
Grantor shall not make nor permit to be made any assignment, pledge or
hypothecation of the Collateral, or grant any security interest in the
Collateral except for the Security Interest.  The Grantor shall not
make nor permit to be made any transfer of any Collateral, except Inventory in
the ordinary course of business and as otherwise permitted by the Loan
Documents, and the Grantor shall remain at all times in possession of the
Collateral owned by it other than transfers to the Lender pursuant to the
provisions hereof and as otherwise provided in this Agreement or the Loan
Documents.

    


    12)           Limitation on Modifications
of Accounts Receivable.  The Grantor will not, without the
Lender’s prior written consent, grant any extension of the time of payment of
any of its Accounts Receivable, compromise, compound or settle the same for less
than the full amount thereof, release,


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    wholly or
partly, any person liable for the payment thereof, or allow any credit or
discount whatsoever thereon other than extensions, credits, discounts,
compromises or settlements granted or made in the ordinary course of
business.

    


    13)           Collections.

    


    a)           
The Grantor shall have the right to collect its Accounts Receivable in the
ordinary course of its business.  During the continuance of an Event
of Default and at the request of Lender in its sole discretion, the Grantor
shall (i) arrange for remittances on any of its Account Receivable to be made
directly to lockboxes or blocked accounts designated by the Lender or in such
other manner as the Lender may direct, and (ii) promptly deposit all payments
received by the Grantor on account of Accounts Receivable, whether in the form
of cash, checks, notes, drafts, bills of exchange, money orders or otherwise, in
one or more accounts designated by the Lender in precisely the form received
(but with any endorsements of the Grantor necessary for deposit or collection),
subject to withdrawal by the Lender only, as hereinafter provided, and until
they are deposited, shall be deemed to be held in trust by the Grantor for and
as the Lender’s property and shall not be commingled with the Grantor’s other
funds.

    


    b)          
 Upon the occurrence and during the continuance of an Event of Default, the
Lender shall have the right, as the true and lawful agent of the Grantor, with
power of substitution for the Grantor and in the Grantor’s name, the Lender’s
name or otherwise, for the use and benefit of the Lender (i) to receive,
endorse, assign and/or deliver any and all notes, acceptances, checks, drafts,
money orders or other evidences of payment relating to the Collateral or any
part thereof; (ii) to demand, collect, receive payment of, give receipt for and
give discharges and releases of all or any of the Collateral; (iii) to sign the
name of the Grantor on any invoice or bill of lading relating to any of the
Collateral; (iv) to send verifications of Accounts Receivable to any customer;
(v) to commence and prosecute any and all suits, actions or proceedings at law
or in equity in any court of competent jurisdiction to collect or otherwise
realize on all or any of the Collateral or to enforce any rights in respect of
any Collateral; (vi) to settle, compromise, compound, adjust or defend any
actions, suits or proceedings relating to or pertaining to all or any of the
Collateral; (vii) to notify, or to require the Grantor to notify, the account
debtors obligated on any or all of the Accounts Receivable to make payment
thereof directly to the Lender; and (viii) to use, sell, assign, transfer,
pledge, make any agreement with respect to or otherwise deal with all or any of
the Collateral, and to do all other acts and things necessary to carry out the
purposes of this Agreement, as fully and completely as though the Lender were
the absolute owner of the Collateral for all purposes; provided, however, that nothing
herein contained shall be construed as requiring or obligating the Lender to
make any commitment or to make any inquiry as to the nature or sufficiency of
any payment received by the Lender or to present or file any claim or notice, or
to take any action with respect to the Collateral or any part thereof or the
moneys due or to become due in respect thereof or any property covered thereby,
and no action taken by the Lender or omitted to be taken with respect to the
Collateral or any part thereof shall give rise to any defense, counterclaim or
offset in favor of the Grantor or to any claim or action against the Lender in
the absence of the gross negligence or willful misconduct of the
Lender.  It is understood and agreed that the appointment of the
Lender as the agent of the Grantor for the purposes set forth above in this
Section 14 is coupled with an interest and is
irrevocable.  The


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    provisions
of this Section 14 shall in no event relieve the Grantor of any of its
obligations hereunder or under the Loan Documents with respect to the Collateral
or any part thereof or impose any obligation on the Lender to proceed in any
particular manner with respect to the Collateral or any part thereof, or in any
way limit the exercise by the Lender of any other or further right which it may
have on the date of this Agreement or hereafter, whether hereunder or by law or
otherwise.

    


    14)           Remedies upon
Default.  Upon the occurrence and during the continuance of an
Event of Default, the Grantor agrees to deliver each item of Collateral to the
Lender on demand, and it is agreed that the Lender shall have the right to take
any or all of the following actions at the same or different times: with or
without legal process and with or without previous notice or demand for
performance, to take possession of the Collateral and without liability for
trespass (except for actual damage caused by the Lender’s gross negligence or
willful misconduct) to enter any premises where the Collateral may be located
for the purpose of taking possession of or removing the Collateral and,
generally, to exercise any and all rights afforded to a secured party under, and
subject to its obligations contained in, the Uniform Commercial Code as in
effect in California or any other applicable state law.  Without
limiting the generality of the foregoing, the Grantor agrees that the Lender
shall have the right, subject to the mandatory requirements of applicable law,
to sell or otherwise dispose of all or any part of the Collateral, at public or
private sale or at any broker’s board or on any securities exchange, for cash,
upon credit or for future delivery as the Lender shall deem
appropriate.  Each such purchaser at any such sale shall hold the
property sold absolutely free from any claim or right on the part of the
Grantor, and the Grantor hereby waives (to the extent permitted by law) all
rights of redemption, stay and appraisal which the Grantor now has or may at any
time in the future have under any rule of law or statute now existing or
hereafter enacted. Without limiting the foregoing, upon the occurrence and
during the continuance of an Event of Default, immediately upon Lender’s demand
Grantor shall transfer all Cash, including but not limited to all proceeds of
Collateral, to Lender, and shall execute all documents reasonably requested by
Lender to effectuate an assignment of all of Grantor’s deposit accounts and
account balances to Lender at any and all financial institutions at which such
deposits exist at the time of such demand.

    


    15)           The
Lender shall give the Grantor ten (10) days’ written notice (which the Grantor
agrees is reasonable notice) of the Lender’s intention to make any sale of
Collateral.  Such notice, in the case of a public sale, shall state
the time and place for such sale and, in the case of a sale at a broker’s board
or on a securities exchange, shall state the board or exchange at which such
sale is to be made and the day on which the Collateral, or portion thereof, will
first be offered for sale at such board or exchange.  Any such public
sale shall be held at such time or times within ordinary business hours and at
such place or places as the Lender may fix and state in the notice (if any) of
such sale.  At any such sale, the Collateral, or portion thereof, to
be sold may be sold in one lot as an entirety or in separate parcels, as the
Lender may (in its sole and absolute discretion) determine.  The
Lender shall not be obligated to make any sale of any Collateral if it shall
determine not to do so, regardless of the fact that notice of sale of such
Collateral shall have been given.  The Lender may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the same was so adjourned.  In case any sale of all or any
part of the Collateral is made on credit or for future delivery, the Collateral
so sold may be retained by the


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    Lender
until the sale price is paid by the purchaser or purchasers thereof, but the
Lender shall not incur any liability in case any such purchaser or purchasers
shall fail to take up and pay for the Collateral so sold and, in case of any
such failure, such Collateral may be sold again upon like notice. At any public
sale made pursuant to this Section 14, the Lender may bid for or purchase, free
(to the extent permitted by law) from any right of redemption, stay or appraisal
on the part of the Grantor (all said rights being also hereby waived and
released to the extent permitted by law), with respect to the Collateral or any
part thereof offered for sale and the Lender may make payment on account thereof
by using any claim then due and payable to the Lender from the Grantor as a
credit against the purchase price, and the Lender may, upon compliance with the
terms of sale, hold, retain and dispose of such property without further
accountability to the Grantor therefore.  For purposes hereof, a
written agreement to purchase the Collateral or any portion thereof shall be
treated as a sale thereof; the Lender shall be free to carry out such sale and
purchase pursuant to such agreement, and the Grantor shall not be entitled to
the return of the Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Lender shall have entered into such an
agreement all Events of Default shall have been remedied and the Obligations
paid in full.  As an alternative to exercising the power of sale
herein conferred upon it, the Lender may proceed by a suit or suits at law or in
equity to foreclose this Agreement and to sell the Collateral or any portion
thereof pursuant to a judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court-appointed
receiver.

    


    16)           Application of
Proceeds.  The proceeds of any collection or sale of
Collateral, as well as any Collateral consisting of cash, shall be applied by
the Lender as follows:

    


    a)           
FIRST, to the payment of all reasonable costs and expenses incurred by the
Lender in connection with such collection or sale or otherwise in connection
with this Agreement or any of the Obligations, including, but not limited to,
all court costs and the reasonable fees and expenses of its agents and legal
counsel, the repayment of all advances made by the Lender hereunder on behalf of
the Grantor and any other reasonable costs or expenses incurred in connection
with the exercise of any right or remedy hereunder;

    


    b)           
SECOND, to the payment in full of principal and interest in respect of the Loan
then outstanding;

    


    c)           
THIRD, to the payment in full of all Obligations (other than those referred to
above) owed to the Lender; and

    


    d)           
FOURTH, to the Grantor, its successors and assigns, or as a court of competent
jurisdiction may otherwise direct.

    


    17)          Upon
any sale of the Collateral by the Lender (including, without limitation,
pursuant to a power of sale granted by statute or under a judicial proceeding),
the receipt of the Lender or of the officer making the sale shall be a
sufficient discharge to the purchaser or purchasers of the Collateral so sold
and such purchaser or purchasers shall not be obligated to see to the
application of any part of


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    the
purchase money paid over to the Lender or such officer or be answerable in any
way for the misapplication thereof.

    


    18)           Locations of Collateral;
Place of Business.

    


    a)          
 The Grantor hereby represents and warrants that all the Collateral is
located in California.  The Grantor agrees not to establish, or permit
to be established, any other location for Collateral unless all filings under
the Uniform Commercial Code as in effect in any state or otherwise which are
required by this Agreement or the Loan Documents to be made with respect to the
Collateral have been made and the Lender has a valid, legal and perfected
security interest in the Collateral.

    


    b)        
   The Grantor agrees not to change, or permit to be changed, the
location of its chief executive office unless all filings under the Uniform
Commercial Code or otherwise which are required by this Agreement or the Loan
Documents to be made have been made and the Lender has a valid, legal and
perfected security interest.

    


    19)           Security Interest
Absolute.  All rights of the Lender hereunder, the Security
Interest, and all obligations of the Grantor hereunder, shall be absolute and
unconditional irrespective of (i) any lack of validity or enforceability of the
Loan Documents, any other agreement with respect to any of the Obligations or
any other agreement or instrument relating to any of the foregoing, (ii) any
change in the time, manner or place of payment of, or in any other term of, all
or any of the Obligations, or any other amendment or waiver of or consent to any
departure from the Loan Documents, or any other agreement or instrument, (iii)
any exchange, release or non-perfection of any other Collateral, or any release
or amendment or waiver of or consent to or departure from any guarantee, for all
or any of the Obligations, or (iv) any other circumstance which might otherwise
constitute a defense available to, or discharge of, the Grantor or any other
obligor in respect of the Obligations or in respect of this
Agreement.

    


    20)           No
Waiver.  No failure on the part of the Lender to exercise, and
no delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy by the Lender preclude any other or further exercise thereof or
the exercise of any other right, power or remedy.  All remedies
hereunder are cumulative and are not exclusive of any other remedies provided by
law.  The Lender shall not be deemed to have waived any rights
hereunder or under any other agreement or instrument unless such waiver shall be
in writing and signed by such parties.

    


    21)           Lender Appointed
Attorney-in-Fact.  The Grantor hereby appoints the Lender its
attorney-in-fact solely for the purpose of carrying out the provisions of this
Agreement and taking any action and executing any instrument which the Lender
may deem necessary or advisable to accomplish the purposes hereof, which
appointment is irrevocable and coupled with an interest.

    


    22)           Lender’s Fees and
Expenses.  The Grantor shall be obligated to, upon demand, pay
to the Lender the amount of any and all reasonable expenses, including the
reasonable fees and expenses of


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    its
counsel and of any experts or agents which the Lender may incur in connection
with (i) the administration of this Agreement, (ii) the custody or
preservation of, or the sale of, collection from, or other realization upon, any
of the Collateral, (iii) the exercise or enforcement of any of the rights of the
Lender hereunder, or (iv) the failure by the Grantor to perform or observe any
of the provisions hereof.  In addition, the Grantor indemnifies and
holds the Lender harmless from and against any and all liability incurred by the
Lender hereunder or in connection herewith, unless such liability shall be due
to the gross negligence or willful misconduct of the Lender.  Any such
amounts payable as provided hereunder or thereunder shall be additional
Obligations secured hereby and by the other Security Documents.

    


    23)           Binding Agreement;
Assignments.  This Agreement, and the terms, covenants and
conditions hereof, shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that the Grantor
shall not be permitted to assign this Agreement or any interest herein or in the
Collateral, or any part thereof, or any cash or property held by the Lender as
Collateral under this Agreement, except as contemplated by this Agreement or the
Loan Documents.

    


    24)           Governing
Law.  (a) This Agreement shall be construed in accordance with
and governed by the laws of the state of California, except to the extent that
the validity or perfection of the security interest hereunder, or remedies
hereunder, which shall be governed by the appropriate jurisdiction relating to
the specific Collateral itself.  Venue for any action under this
Agreement or any of the Loan Documents shall be in the Superior Court located in
Santa Monica, California.  The prevailing party in any dispute arising
hereunder shall be entitled to recover all of its reasonable attorney’s fees and
costs of defense, prosecution or litigation.  The Grantor hereby
expressly and irrevocably submits to the jurisdiction of the state and federal
courts of the State of California, city of Los Angeles (and Santa Monica
specifically for state court), for the purpose of any such litigation as set
forth above and irrevocably agrees to be bound by any final judgment rendered
thereby in connection with such litigation.  The Grantor further
irrevocably consents to the service of process by registered mail, postage
prepaid, or by personal service within or without the State of
California.  The Grantor hereby expressly and irrevocably waives, to
the fullest extent permitted by law, any objection which it may have or
hereafter may have to the laying of venue of any such litigation brought in any
such court referred to above and any claim that any such litigation has been
brought in any inconvenient forum.  To the extent that the Grantor has
or hereafter may acquire any immunity from jurisdiction of any court or from any
legal process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) with respect to itself or its
property, the Grantor hereby irrevocably waives such immunity in respect of its
obligations under this agreement and the other Loan Documents.

    


    (b)           Waiver of Jury
Trial.  The parties hereby knowingly, voluntarily and
intentionally waive any rights they may have to a trial by jury in respect of
any litigation based hereon, or arising out of, under, or in connection with,
this agreement, or any course of conduct, course of dealing, statements (whether
oral or written) or actions of any of the parties hereto.


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    25)           Notices.  All
communications and notices hereunder shall be in writing and given as provided
in the Loan Documents.

    


    26)           Severability.  In
case any one or more of the provisions contained in this Agreement should be
invalid, illegal or unenforceable the remaining provisions contained herein
shall not in any way be affected or impaired.

    


    27)           Section
Headings.  Section headings used herein are for convenience
only and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.

    


    28)           Counterparts.  This
Agreement may be executed in two or more counterparts, each of which shall
constitute an original, but all of which, when taken together, shall constitute
but one instrument.  This Agreement shall be effective when a
counterpart which bears the signature of the Grantor shall have been delivered
to the Lender.

    


    29)           Termination.  This
Agreement and the Security Interest shall terminate when all the Obligations
have been fully and indefeasibly paid in cash, at which time the Lender shall
execute and deliver to the Grantor all Uniform Commercial Code termination
statements and similar documents which the Grantor shall reasonably request to
evidence such termination; provided, however, that all
indemnities of the Grantor contained in this Agreement shall survive, and remain
operative and in full force and effect regardless of, the termination of this
Agreement.

    


    IN
WITNESS WHEREOF, the parties hereto have duly executed this Security Agreement
as of the day and year first above written.

    


    MATERIAL
TECHNOLOGIES, INC.

    
 

    By: /s/ Robert
Bernstein                                                      

          Robert
Bernstein

          Chairman
and Chief Executive Officer

    


    KREUZFELD
LTD.

    


    


    By:                                           

           
Name: Markus Winkler

             
Title:   sole officer

      

    

    
 


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    EXHIBIT
A

    


    Collateral

    


    All
rights, title, claims and interests of every kind and character of Material
Technologies, Inc., a Delaware corporation, and any of its subsidiaries (the
“Debtor”), or any of them (whether tangible, intangible, choate, inchoate,
legal, direct, indirect, possessory, nonpossessory, vested, nonvested,
beneficial or equitable) in any assets, property or property rights now or at
any time hereafter owned, held, used or acquired by Debtor whether in the name
of any of them or in any fictitious business name or in any other name, and
whether or not particularly described herein, including without limitation: all
cash, inventory, accounts receivable, new and used finished goods, products,
merchandise, work in process, raw materials, parts, supplies, accessories,
attachments whether or not held for sale, lease, use or consumption and any
property classified as inventory by the Uniform Commercial Code (“UCC”),
machinery, equipment, tools, dies molds, furniture, general intangibles, as that
term is defined by said UCC, good will, trademarks, trade names, service names
and marks, licenses, patents rights, copyrights, inventions, negotiable and
non-negotiable instruments and documents, things in action and all other rights,
privileges and franchises, all rights under any leases (including without
limitation any lease of any of Debtor’s business premises) whether of real or
personal property and whether as landlord, tenant, or otherwise, chattel paper,
accounts, deposit accounts, and instruments, as those terms are defined by the
UCC, condemnation or insurance recoveries, rents, royalties, profits,
certificated and uncertificated securities, treasury stock, commercial paper,
business records and reports, documents, claims, commission, contracts, causes
of action, suits, rights of offset or recoupment, fixtures, as that term is
defined by said UCC, and all products and proceeds (as defined in said UCC),
accessions, additions, increases, repairs to, improvements and replacements of
each of the foregoing items of Collateral.  Further, “Collateral” shall
also mean all rights, title, claims and interests of every kind and character of
Debtor under any name (whether tangible, intangible, choate, inchoate, legal,
direct, indirect, possessory, nonpossessory, vested, nonvested, beneficial or
equitable) in the common stock and/or other debt or equity interests and/or
other interests in any corporation or in any other partnership or other legal
entity involved in which the Debtor has an interest now or at any time hereafter
owed, held, used or acquired.  “Collateral” shall
also include all products and proceeds (as defined in said UCC), accessions,
additions, increases, repairs to, improvements and replacements of each of the
foregoing items of Collateral.

    


    


    MATERIAL
TECHNOLOGIES, INC.

    


    


    By: /s/ Robert
Bernstein                                                               

          
Robert Bernstein

          
Chairman and Chief Executive Officer